Measures introduced in the 2016 federal budget proposed that exchanging units of one corporate class fund for another would no longer be tax deferred, starting October 1, 2016. This proposal was highlighted in our post-budget release titled 2016 Federal Budget impact on investors. Draft legislation was released on July 29, 2016, which extended the effective date of this change to January 1, 2017.
Canadian mutual funds can be in the legal form of a trust or a corporation. While most funds are structured as mutual fund trusts, some are also structured as mutual fund corporations (otherwise known as corporate class mutual funds or 'switch funds').
For those investing outside of their registered plans, one of the key benefits of corporate class mutual funds was the ability to exchange shares of one class of the mutual fund corporation for shares of another class on a tax deferred basis. Investors were essentially able to switch between funds without triggering capital gains or losses. A capital gain (or loss) did not have to be reported recognized as ported until the holding in the corporation was disposed of.
In the July 29 draft proposals, exchanges of shares within the corporate class structure that occur after 2016 will be considered a fair market value disposition for tax purposes. This will eliminate the tax deferral and trigger a capital gain if the investment has risen in value at the time of the switch.
There are two exceptions to the new rules where tax deferred switching will continue to be allowed if:
- the exchange of shares is the result of the mutual fund corporation undergoing a capital reorganization or amalgamation, provided all shares of a particular class are exchanged; or
- the shares exchanged are from the same share class but are from a different series (e.g., T-series, A-series). In this situation, the underlying investments remain the same, but the series is distinguished by different fees or other share attributes. To qualify for this exception, the different series of the share class must be recognized as a single investment fund under Canadian securities laws.
If you hold corporate class mutual fund investments as part of your non-registered portfolio, you should review your holdings and consider if you need to make any strategic asset allocation changes before the end of 2016.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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